Banks have built strong cushion to weather the storm.

TALLINN -- Banks in Estonia have written off about 3.8 billion kroons (243 million euros) in losses for the first six months of 2009, but these losses may not inflict as much pain as some might expect, reports bbn.ee. For the past eight years, bank profits have totaled a cumulative 22 billion kroons, much of which are still retained on the books.

Analysts say that banks have been conservative regarding their loan loss reserves. "I think it's likely that loan losses are remarkably smaller than the provisions the banks are showing," says emeritus professor and former chairperson of the Estonian Central Bank Mart Sorg.

"The banks haven't deleted debts from the 1990s; these remain, waiting for the borrower's [condition] to improve," he notes.

Asserting that the banks won't write off bad debts so easily, Sorg said of previous times, "When loans were issued in the 1940s, we went and claimed [the bad ones] still in the 1960s. The debt will not be forgotten!" He says that banks become more conservative the longer the period the loans are overdue, and as more of the debts go onto the loss column.

"It's logical that actual losses [taken] will be much smaller than what's written off in advance, what perhaps the banks fail to collect. Currently those securities exist and are unsold. It's not that bad," says Sorg.

SEB bank's 575 million kroon loss in Q2 "can be considered 'virtual,' since it included a discount of 377 million kroons for writing off non-material assets after Tallinna Bank was taken over. Actually, not a penny moved off from the bank's balance sheet," he explains.

CEO of SEB Ahti Asmann says "solid capitalization at the local level, and through its parent bank, gives SEB its strength." "SEB's capital base was 10.7 billion kroons at the end of this year's second quarter, 5.3 billion kroons higher than required by regulation. SEB Group did a successful issue of equity capital, nearly 22 billion kroons, which makes the bank the best capitalized, not only in Scandinavia, but in all of Western Europe," Asmann said.

He said however that one must keep in mind when comparing today's situation with that of the end of the 1990s, that people and companies have a notably higher debt burden today, and this is not just a local, but a global economic recession.

"When the situation in the economy improves sharply, extraordinary profits are likely to result. But when making reserves for loan losses, we can't assume that the situation improves rapidly in the near future, signs show rather the opposite," he said.

Sampo Bank CEO Aivar Rehe says that the final estimation of the banks' results will be clear when the economic downturn is over. "We're in the middle of the crisis, we admit we're not out of the cycle yet, and can start analyzing actual losses only in 2010-2011," he said.

From wire reports